1. avatar says

    Hi. I can’t understand the explanations for question one. Why is the extra 5000 deducted from the difference in cost? Is the difference in cost always a fixed cost? When it says exceeds 17500 units, is it in the total or the highest activity level only?

    • Avatar of johnmoffat says

      As I explained in my answer to your question yesterday, the difference is usually due to the extra variable cost of the extra units – the total fixed costs normally stay fixed (by definition).

      However, in this question there is a stepped fixed cost – the fixed cost increases when the activity is more than 17,500 units.
      Since the higher of the two activity levels (22000) is higher than 17500, the fixed costs must be higher than the fixed costs at the lower level (16000).

      So….since the step up is $5000, then $5000 of the difference is due to the higher fixed costs. The rest of the difference is, as normal, the extra variable cost of the extra units.

    • Avatar of johnmoffat says

      Just suppose that you make 10,000 units and the variable cost is $5 per unit and the fixed cost is $10,000.
      Then the total cost is (10000 x $5) + $10,000 = $60,000.

      Suppose next month you make 15,000 units. Why should the total cost change? The fixed cost will stay the same, and so the only thing that will change will be the variable cost – an extra $5 for each unit.
      So the total cost would not be (15,000 x $5) + $10,000 = $85,000

      All we are doing with high/low is the same thing backwards.

      The total cost went up by $25,000. The number of units went up by 5,000. Since the only reason for the increase is due to more variable costs, it must mean that $25,000 is the extra variable cost for the extra 5,000 units. So the variable cost per unit is $25,000/5,000 = $5 per unit.

  2. avatar says

    Hi John,

    From the course note in chapter 4, page 17- there got mentioned about the Responsibility centres:
    a) cost centres
    b) profit centres
    c) revenue centres
    d) investment centres

    Why do we need to know about these responsibility centres?

    Thank you.

    • Avatar of johnmoffat says

      Because it affects the way that we measure the performance of the centre and of the managers.

      (If you want me to answer your question then please in future ask in the Ask the ACCA Tutor Forum for Paper F2)

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